1300 Desert Willow Road is a light industrial building in the Los Morros Business Park in Los Lunas. It was the only asset of 1300 Desert Willow Road, LLC, which borrowed $20 million from Romspen Investment LP in April 2022 and, after two years of forbearance, filed Chapter 11 in June 2025, in Manhattan. On July 21, 2026, Judge Philip Bentley issued a bench decision in In re 1300 Desert Willow Road, LLC, No. 25-11375 (PB) (Bankr. S.D.N.Y.), holding that the “reasonable” limit in 11 U.S.C. § 506(b) applies only to charges that accrue after the petition.
For New Mexico owners, venue is one twist. The other is that the Bankruptcy Court for the District of New Mexico drew nearly the same line in 2010.
Why did a Los Lunas building end up in a New York bankruptcy court?
Venue comes from 28 U.S.C. § 1408, which permits filing where the debtor’s “domicile, residence, principal place of business in the United States, or principal assets in the United States” sat for most of the prior 180 days. The building was in Valencia County, but the court’s earlier published ruling, In re 1300 Desert Willow Rd., LLC, 677 B.R. 176 (Bankr. S.D.N.Y. 2026), identifies the debtor as a New York LLC, and an entity’s domicile is generally treated as its state of organization.
Transfer remains possible under 28 U.S.C. § 1412 “in the interest of justice or for the convenience of the parties,” after notice and a hearing under Fed. R. Bankr. P. 1014(a)(1). So a New Mexico owner whose property company is organized elsewhere may litigate its lender’s claim half a continent from the building, even though here a New Mexico state court had appointed a receiver in early 2023.
What did Judge Bentley decide about prepetition fees and default interest?
Section 502(b) measures a claim on the filing date and allows it unless “unenforceable against the debtor and property of the debtor, under any agreement or applicable law.” The exception, § 506(b), serves a lender whose collateral exceeds its claim. In United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989), the Supreme Court held that “[r]ecovery of postpetition interest is unqualified,” while fees, costs, and charges must be reasonable.
Reading the sections together, Judge Bentley found § 506(b) ambiguous and chose the narrower reading, leaving earlier charges to the law the note selected, New York’s. He disallowed prepetition late charges as a penalty duplicating default interest. Forbearance fees were allowed. Postpetition default interest was allowed only if the pending sale proves Romspen oversecured; postpetition late charges were disallowed.
A July 21, 2023 forbearance agreement scheduled the amounts then owed, and because the debtor never challenged it, the court treated those figures as fixed. A payoff recital deserves the scrutiny given a stipulated judgment.
Which courts apply § 506(b) reasonableness to prepetition lender fees?
The en banc Eleventh Circuit in In re Welzel, 275 F.3d 1308 (11th Cir. 2001), applied § 506(b) “across-the-board to all contractually set attorney’s fees,” including fees vested before filing. The Fifth Circuit agreed in In re 804 Congress, L.L.C., 756 F.3d 368 (5th Cir. 2014), that the statute “does not draw a distinction between fees vested pre- or post-petition.”
Both cases involved attorney’s fees. And Welzel did not erase the excess; it held the unreasonable portion is “treated as an unsecured claim.” In a solvent case that slice still gets paid ahead of the owner.
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Has the Tenth Circuit or the New Mexico bankruptcy court taken a side?
No published Tenth Circuit decision resolving the question was located, but the signals lean toward Judge Bentley. In In re Gledhill, 164 F.3d 1338, 1340 (10th Cir. 1999), the court said oversecured creditors “are entitled to interest, penalties, attorney fees, and costs that accrue before” the petition. That was dicta. The Bankruptcy Appellate Panel, in In re Sun ‘N Fun Waterpark, LLC, 408 B.R. 361 (10th Cir. BAP 2009), deferred to a state-court fee judgment and repeated its earlier view that § 506(b) has “no relevance to the allowance of prepetition fees.”
Closest to home is In re Market Center East Retail Property, Inc., 433 B.R. 335 (Bankr. D.N.M. 2010), involving an Albuquerque shopping center. Judge James S. Starzynski allowed prepetition default interest and late charges under § 502(b)(1) and New Mexico law, then tested postpetition charges under § 506(b). He allowed the 12.74 percent default rate but struck a $377,438.82 late fee on the matured balloon as a penalty.
How does New Mexico law treat default interest and late charges?
Under Judge Bentley’s approach, prepetition charges on a New Mexico note rise or fall on New Mexico contract law. This is description only; state-law questions belong with New Mexico-licensed counsel. First National Bank in Albuquerque v. Energy Equities, Inc., 91 N.M. 11, 569 P.2d 421 (Ct. App. 1977), treats a higher post-default rate as “merely contractual.” Usury rarely helps an entity borrower, as NMSA 1978, § 56-8-9(B) exempts business-entity debtors from maximum-rate laws. The 15 percent rate in § 56-8-3 applies only absent a written rate.
Flat charges draw closer review. Gruschus v. C.R. Davis Contracting Co., 75 N.M. 649, 409 P.2d 500 (1965), refuses enforcement where the amount is “so extravagant or disproportionate as to show fraud, mistake or oppression,” and Nearburg v. Yates Petroleum Corp., 1997-NMCA-069, 123 N.M. 526, describes a penalty as one that “goes beyond compensation into punishment.” Applying both, In re WM Distribution, Inc., 591 B.R. 52 (Bankr. D.N.M. 2018), refused a $600,000 default add-on to a $1.3 million note. No New Mexico appellate ruling on forbearance fees was found.
What changes when the debtor is single asset real estate?
Under § 101(51B), a leased Los Lunas warehouse producing substantially all of its owner’s income is classic single asset real estate. Section 362(d)(3) gives that debtor 90 days after the order for relief (or 30 days after a SARE determination, if later) to file a plan with “a reasonable possibility of being confirmed within a reasonable time” or start monthly payments to the lender.
Those payments run at “the then applicable nondefault contract rate of interest” on the value of the lender’s interest. Meanwhile an oversecured claim can keep accruing at the default rate, eating the cushion.
How much turns on the prepetition question for a $6 million Los Lunas loan?
Suppose a $6,000,000 interest-only loan at 8 percent, with a 13 percent default rate, 5 percent late charges and a 5 percent acceleration charge. After twelve missed payments and two $90,000 forbearance fees, the petition-date claim is principal plus $480,000 of contract interest, $300,000 of default increment, $24,000 of late charges, a $300,000 acceleration charge, $180,000 of forbearance fees and $60,000 of legal fees: $7,344,000.
With an $8,000,000 appraisal, the cushion is $656,000. Ten months in Chapter 11 at 13 percent adds $650,000, plus $150,000 of lender legal fees. That $800,000 overruns the cushion and wipes out the owner’s equity. If the acceleration charge and monthly late charges fall as penalties under New Mexico law, the claim drops to $7,020,000, the cushion grows to $980,000, and roughly $180,000 stays with the owner. Proof matters. The Desert Willow debtor lost its forbearance fee challenge largely by offering no evidence the fees were above market.
| Charge | Bentley (S.D.N.Y. 2026) | Fifth and Eleventh Circuits | Tenth Circuit and D.N.M. |
|---|---|---|---|
| Prepetition late fees | State law; disallowed as penalty | § 506(b) reasonableness; excess unsecured | Allowed under § 502(b)(1) (Market Center East) |
| Prepetition forbearance fees | State law; allowed | § 506(b) reasonableness | No decision located |
| Prepetition attorney’s fees | State law | § 506(b) reasonableness | State-court judgment binding (Sun ‘N Fun) |
| Postpetition default interest | Allowed if oversecured | Unqualified (Ron Pair) | 12.74 percent allowed (Market Center East) |
| Postpetition late fees | Disallowed as duplicative | § 506(b) reasonableness | Balloon late fee struck |
Frequently Asked Questions
Can a lender collect default interest after a bankruptcy filing?
Only if the lender is oversecured, meaning its collateral is worth more than its claim. Section 506(b) then allows interest with no reasonableness limit, and courts generally presume the contract default rate applies unless equities weigh against it.
Can a New Mexico business file bankruptcy in another state?
Under 28 U.S.C. § 1408, venue lies where the debtor’s domicile, residence, principal place of business, or principal assets sat for most of the prior 180 days. An LLC organized in New York may file there even if its only property is in New Mexico.
Are late fees on a commercial loan enforceable in New Mexico?
Usually. New Mexico courts enforce agreed damages unless the amount is so extravagant or disproportionate that it shows fraud, mistake, or oppression. New Mexico bankruptcy judges have still struck a balloon late fee and a $600,000 default add-on as penalties.
What is the 90-day deadline in single asset real estate bankruptcy cases?
Section 362(d)(3) gives a SARE debtor 90 days after the order for relief, or 30 days after the court finds SARE status if later, to file a plausibly confirmable plan or start monthly interest payments to its mortgage lender at the nondefault contract rate.
Does signing a forbearance agreement affect a later objection to lender fees?
It can. In the Desert Willow case, a 2023 forbearance agreement listed the amounts then owed, fees included. Because the borrower never challenged that agreement, the bankruptcy court treated those amounts as fixed and reviewed only later charges.
Has the Tenth Circuit decided whether prepetition lender fees must be reasonable under § 506(b)?
No published Tenth Circuit decision squarely resolving it was located. The Tenth Circuit has described prepetition fees as part of the claim measured at filing, and the New Mexico bankruptcy court applied state law to prepetition charges in 2010.
How North Star Law Firm Can Help
North Star Law Firm represents New Mexico business owners and guarantors in secured claim objections and the valuation fights that decide whether a lender is oversecured. That work runs through Chapter 11 and Subchapter V cases within the firm’s bankruptcy practice.
Phillip Zagotti, JD/CPA, is admitted before the United States District Court and Bankruptcy Court for the District of New Mexico, and brings a CPA’s read to the arithmetic behind a secured lender’s claim. The firm works alongside New Mexico-licensed counsel on state-law questions. Owners weighing options can start with the firm’s guide to choosing a bankruptcy chapter as a New Mexico business owner. To discuss a lender’s claim, contact North Star Law Firm.